The CBOE announced when the SPX PM Settle options will officially be listed, and that date is October 4th (read the microsite here). I am super excited to see how this product performs as it could be a make or break for the CBOE. If it is a success, the CBOE is in a position to make a killing on this product. If it is a failure, it will join a long list of CBOE products that haven’t worked.
Why they are listing the product:
SPX volume while incredibly robust, has flat lined over the last few years. OEX volume is now completely non-existent. SPY option volume and S&P 500 futures volume continues to increase monthly and quarterly basis. The only way for SPX to grow is to take some of the growth that is in SPY and ES options.
At Stake:
If CBOE can make this product work, it will be a massive success. And will end a list of failed product launches.
If it works:
Market makers will love it for the heavy retail paper, initially wider markets, and, of course, the maker taker fees vs. the SPX AM contract. Brokerage houses will love it for the maker-taker model as well and begin to move large customers out of SPY and into SPX PM. Volume in SPX PM will steal little paper from the AM and a lot of paper from SPY and ES.
Why it might not work:
Going after the SPX AM pit is a big risk. Pissing off all those traders could be a problem (although doubtful). The big houses may not buy into the PM settle, or the floor brokers may not want to quote it. However, the real question is this: is the maker-taker fee enough that the brokerage houses will be willing to part with the extra contract commission they collect on SPY. This is a big question. If they do the right thing, they will point their large clients toward this product. If they stick to the usual, don’t expect to hear many of them discuss this product.
My thoughts:
That potential maker taker fee has many market making firms interested. The fact that it is on C2 could be a problem, but, in the end, this will be a mild success. I think it will carp some of the SPX AM volume; however, I predict it will tighten all markets in SPX and will capture the entire large retail base. This time next year, I think this product will trade 10-15k contracts a day or more. In two years, it could challenge SPX AM, and it will eventually force all SPX to go full hybrid or electronic.
This is a good thing for retail traders. Expect the vols to line up really well with SPY and ES; howeve,r deeps will be different since this is a European style contract. I will report on how it trades on October 5th.
